Yesterday, the SEC announced this rather unusual Foreign Corrupt Practices Act enforcement action against Vantage Drilling.
What made it rather unusual is that the administrative action only found violations of the FCPA’s internal controls provisions concerning its unique relationship with a former outside director and shareholder that “created a risk that [the company] was providing or reimbursing funds that [the Director] intended to use to make improper payments to officials at Petrobras” in connection with obtaining a drilling services contract.
This administrative order finds in summary fashion:
“These proceedings arise from violations of the internal accounting control provisions of the FCPA by Vantage Drilling Company (“VDC”). Specifically, VDC failed to devise a system of internal accounting controls with regard to VDC’s transactions with VDC’s former outside director, largest shareholder, and only supplier of drilling assets (“Director A”), and failed to properly implement internal accounting controls related to its use of third-party marketing agents. These violations occurred against a backdrop where VDC had an ineffective anticorruption compliance program.
As a result of its internal accounting control failures, VDC made substantial payments to Director A that, among other things, created a risk that VDC was providing or reimbursing funds that Director A intended to use to make improper payments to officials at Petroleo Brasileiro SA Petrobras (“Petrobras”), a Brazilian state-owned oil and gas company, in connection with obtaining an 8-year drilling services contract valued at over $1.8 billion that benefited both Director A, as the supplier of the drilling asset, and VDC.”
In previous disclosures, Vantage identified the former Director as Hsin-Chi Su (a.k.a. Nobu Su) and the former agent as Hamylton Padilha.
Regarding the unusual relationship with Su, the order states:
“VDC was formed in 2006 by former executives and directors of a major offshore drilling company. After an initial public offering in May 2007, VDC sought to market itself as an ultra-high end driller but did not own any drilling assets. During 2007, VDC identified Director A, a Taiwanese shipping magnate that had previously placed orders at a Korean shipyard for offshore drilling rigs, as a prospective investor and/or supplier. Through a series of agreements entered into in 2007 and 2008, VDC acquired the rights to purchase Director A’s drilling assets, including the Titanium Explorer, an ultra-deepwater drillship, which had an expected delivery date in 2012. In return, Director A was appointed to VDC’s board, paid $56 million in cash, and issued 40% of VDC’s common stock – making Director A VDC’s largest shareholder.
VDC did not conduct any due diligence on Director A or his related companies to assess whether he was capable of fulfilling his contractual obligations before relying on him as its sole source of drilling equipment and appointing him to its board of directors.
In connection with VDC’s efforts to buy another drillship, the Platinum Explorer, from Director A, Director A misrepresented the underlying terms of his payment plan with the Korean shipyard building the drillship and falsely represented to VDC that he would make the payments to the shipyard in advance of receiving a corresponding payment from VDC. In September 2008, VDC learned that – not only had Director A failed to make the installment payment to the shipyard – but he claimed to be incapable of making the payment. In response, VDC provided Director A with $32 million to make the installment payment. Later, VDC learned that the shipyard had granted Director A an extension, and the $32 million was not actually due in September 2008. Despite VDC’s knowledge of the misrepresentations by Director A, VDC did not enhance its internal accounting controls in regards to its transactions with respect to Director A.
Ultimately, VDC was unable to obtain financing for the purchase of the Titanium Explorer outright. Instead, VDC announced on November 19, 2008 that Director A would continue to wholly own the Titanium Explorer but that Director A would engage and pay VDC to oversee construction of and then operate the drillship. Under the agreements memorializing these arrangements, VDC was to be paid $5 million a year to oversee construction of the Titanium Explorer and anticipated that it would be paid between $13 and $15 million a year to operate the drillship. As part of the agreement, Director A also authorized VDC to market the Titanium Explorer to potential clients.”
Under the heading “The Titanium Explorer Contract,” the order states:
“In early 2007, the CEO of VDC contacted a Brazilian third-party agent (“Agent”) and requested his assistance in marketing VDC to Petrobras. While VDC policies required due diligence and prudent safeguards against improper payments to be in place with an agent who acted on its behalf with regard to foreign governments on international business development before retaining the agent, neither was done with respect to the Agent. Instead, without these internal accounting controls in effect, the Agent assisted VDC in responding to a marketing inquiry released by Petrobras’ International Division (“PBID”) on August 15, 2008 seeking proposals from drilling operators who could deliver a new ultra-deepwater drillship.
During the bidding process, the Agent was contacted by an individual who identified himself as an intermediary (“Intermediary A”) for a senior PBID official (“PBID Official”) and who informed the Agent that the PBID Official was willing to award the contract to VDC in return for a payment of money. Intermediary A introduced the Agent to another person also identified as an intermediary for the PBID Official (“Intermediary B”) who explained that a portion of the requested bribe was earmarked for the Brazilian politicians that appointed the PBID Official to his position at Petrobras.
At the Agent’s request, the CEO and another VDC Director (“Director B”) arranged a meeting in New York City between Director A and the Agent on November 22, 2008, for the purported purpose of familiarizing the Agent with Director A, the owner of the drillship being marketed to PBID. In actuality, and unbeknownst to the CEO and Director B, the Agent had requested the meeting in order to speak directly to Director A to ask whether Director A was willing to make the improper payments the PBID Official demanded. At a private meeting between the Agent and Director A, the Agent told Director A that in order to win the contract, Director A would have to pay a commission to the Agent and an additional payment to the PBID Official. Although the Agent and Director A did not discuss specific amounts, Director A agreed to personally make the payments and to travel to Brazil to finalize the details.
The Agent personally agreed to make an additional payment of $1 million to a PBID manager that was PBID’s chief negotiator for the contract. At the request of the Agent, the PBID manager agreed to defer receipt of the bribe payment until 2012 when the Titanium Explorer began working for Petrobras and the Agent would begin receiving his commission payments. In return for the promised $1 million, the PBID manager supported VDC in the bidding process over its competitors.
During the ensuing weeks, the Agent told the CEO that Petrobras officials were still concerned about entering a contract with VDC that required the use of a drillship that VDC did not own and wanted to meet with Director A in Brazil. In actuality, the purpose of the meeting, which took place on December 20, 2008, in Rio de Janeiro, was to formalize the arrangement whereby Director A would make payments from his personal funds to the Agent and Intermediary B with the understanding that the money would be used by the Agent and Intermediary B to pay Petrobras officials. As a result of the meeting, Director A signed consulting agreements with the Agent and Intermediary B, respectively, requiring Director A to make payments in three installments: (1) $6,200,000 when PBID signed the drilling services contract with VDC; (2) $4,650,000 six months after the contract was signed and (3) $4,650,000 when the drillship began working for PBID. In total, Director A agreed to pay $31 million from his personal funds which equated to approximately 1.7% of the expected contract value.
On February 4, 2009, Petrobras and VDC signed the Titanium Explorer contract for an eight-year term and with an approximate value of $1.8 billion. A month later, VDC and Director A formalized their agreement regarding the Titanium Explorer, which required VDC to send Director A all revenues received from Petrobras less VDC’s management fee. This agreement contemplated that Director A would continue to make the necessary installment payments to the shipyard to fund the construction of the drillship. Despite the fact that Director A had already made misrepresentations to VDC related to the Platinum Explorer – once again – VDC failed to establish adequate internal accounting controls with respect to its transactions with Director A.”
Under the heading “The Improper Payments” the order states:
“Two weeks after the Titanium Explorer drilling contract was signed, Director A transferred approximately $6,200,000 to the Agent and Intermediary B, respectively. On September 10, 2009, Director A made the second improper payment that was due.
After the Agent received these payments from Director A, the Agent transferred $550,000 to the former PBID manager on September 17, 2010. Before these funds were transferred, the Agent and the former PBID manager agreed that the manager would accept half of the $1 million that previously had been promised in lieu of waiting to receive the total sum in 2012 when the Titanium Explorer began working for Petrobras.
Before the third improper payment was due from Director A, he sustained substantial financial losses in his other businesses and ran out of funds to continue financing the construction of the Titanium Explorer. To avoid defaulting on its contract with Petrobras, VDC decided to purchase the Titanium Explorer from Director A. After lengthy negotiations, Director A agreed to sell the Titanium Explorer to VDC in exchange for: (1) $169 million in cash, (2) VDC’s agreement to make all future payments due to the shipyard, and (3) VDC’s forgiveness of $33.6 million in debt Director A owed to VDC under the Titanium Explorer construction management agreement. Once again, VDC failed to have sufficient internal accounting controls associated with the transaction. To fund the purchase, VDC conducted a debt offering in April 2012.”
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The order also contains a section titled “Director A’s and the Agent’s Corrupt Acts Went Undetected by VDC Despite Reds Flags” and states:
“Although VDC’s internal accounting controls prohibited making payments in violation of the FCPA both directly and indirectly through third parties and required that suspected violations of the FCPA be reported to the Chief Compliance Officer, VDC did not effectively respond to red flags indicating a risk that Director A and the Agent had promised and made improper payments to Petrobras officials to obtain the Titanium Explorer contract. First, on September 5, 2012, a consultant who had worked for Director A during the negotiations to sell the Titanium Explorer to VDC, hinted to the CEO that Director A expected that VDC would reimburse Director A for his “payment to P.” Second, around the time the third and final improper payment was due, the Agent reported to the CEO that he had personally made a “final payment” regarding the Titanium Explorer contract. Third, on August 9, 2013, a Brazilian reporter sent the CEO and VDC’s marketing department an email requesting clarification for a story she was writing concerning alleged payments made by Director A to obtain the Titanium Explorer contract. In her email, the reporter explicitly stated that Director A had promised three payments but defaulted on the final payment due and asked VDC whether it was aware of the arrangement.
VDC did not follow-up on these red flags, and took no steps to determine whether any payments VDC made to Director A were made to fund or reimburse him for improper payments. Moreover, with regard to the reporter’s inquiry to the CEO, the CEO did not take or direct others to take any action to understand the nature of and basis for the payments described in the reporter’s email.”
Under the heading “The Bribery Scheme Was Exposed,” the order states:
“Ultimately, Director A’s scheme to make improper payments to the Agent and Intermediary B and the Agent’s payment to a former PBID official were exposed as part of a sweeping criminal investigation in Brazil named “Operation Car Wash” that uncovered a decades-long bribery scheme involving Petrobras officials and Brazilian politicians extracting bribes in return for contract awards.
On July 27, 2015, the Agent entered into a collaboration agreement with the Brazilian Federal Public Prosecutor’s Office. As part of his agreement, the Agent admitted to participating in the scheme involving the Titanium Explorer contract. On February 1, 2016, the Agent was convicted of corruption and money laundering. Director A was also charged in Brazil for his part in the scheme.
On August 31, 2015, Petrobras cancelled the Titanium Explorer contract. At the time of cancellation, VDC had realized net profits of approximately $106 million on the contract.
As a result of the revenue loss caused by the contract cancellation, VDC was unable to meet its debt obligations. Consequently, VDC entered into a restructuring agreement with its secured creditors. Pursuant to the restructuring agreement, VDC transferred its tangible assets and operations to Vantage, a wholly-owned subsidiary of VDC and holder of VDC’s senior secured debt, in exchange for a $61.5 million promissory note. On December 3, 2015, Vantage commenced Chapter 11 bankruptcy proceedings in the United States Bankruptcy Court for the District of Delaware. Shortly thereafter, VDC initiated liquidation proceedings in the Cayman Islands. Vantage reemerged from bankruptcy on February 10, 2016.”
Under the heading, “VDC’s Insufficient and Unenforced Internal Accounting Controls,” the order states:
“VDC failed to devise and maintain a sufficient system of internal accounting controls. Specifically, VDC’s internal accounting controls in regards to its transactions with Director A were insufficient in relation to the heightened risk of conducting business in the oil and gas industry in Brazil. The lack of internal accounting controls surrounding VDC’s payments to Director A increased the risk that VDC provided or reimbursed Director A the funds used to make the corrupt payments.
In addition to failing to devise any meaningful internal accounting controls around its transactions with Director A, VDC also did not follow its own internal accounting controls by failing to conduct due diligence on the Agent and follow-up on red flags indicating that Director A and the Agent made corrupt payments in connection with the Titanium Explorer contract.”
Based on the above, the order finds that Vantage violated the FCPA’s internal controls provisions and without admitting or denying the SEC’s findings, Vantage agreed to pay $5 million in disgorgement. Under the heading “Commission Consideration of Vantage’s Cooperation, Remedial Efforts and Current Financial Condition,” the order states:
“[T]he Commission considered Vantage’s cooperation and remedial efforts. Additionally, in determining the disgorgement amount and not to impose a penalty, the Commission has considered Vantage’s current financial condition and its ability to maintain necessary cash reserves to fund its operations and meet its liabilities.
The Company provided significant cooperation to the Commission during the entire course of its investigation. Vantage voluntarily disclosed information obtained during its own internal investigation, highlighted key documents, and disclosed facts that the Commission would not have been able to readily and independently discover. Further, Vantage took the following remedial actions to strengthen its ability to prevent or detect corruption, including: (1) reconstituting its Board of Directors on February 10, 2016; (2) obtaining a completely new management team, including a new Chief Executive Officer, Chief Financial Officer, and General Counsel, Chief Compliance Officer & Corporate Secretary; (3) severing its relationship with the Agent; (4) undertaking a comprehensive review of and enhancing its anticorruption policies and procedures in consultation with outside counsel and consultants; (5) improving its third-party due diligence procedures; (6) undertaking a review of all of its relationships with joint venture partners, agents, customs brokers, and freight forwarders; and (7) committing additional resources to the compliance and internal audit functions at a time when the company reduced its overall expenses.”
The order further states that the SEC “is not imposing a civil penalty based upon [Vantage’s] cooperation in a Commission investigation and its financial condition.”
This company release states:
“As previously disclosed in August 2017, Vantage received a letter from the United States Department of Justice (the “DOJ”) acknowledging Vantage’s full cooperation in the DOJ’s investigation concerning possible violations by Vantage of the FCPA and indicating that the DOJ closed its investigation without taking any action.
The investigation arose in 2015 from allegations of improper payments by a director of VDC to former officials of Petrobras made in 2009 and 2010 in connection with the contracting of the Titanium Explorer drillship to Petrobras. From the outset of the investigation, the Company has provided its full cooperation to the DOJ and the SEC. The SEC noted, as one of its considerations to resolving the matter, that the Company reconstituted its Board of Directors and put in place a new management team.
With the settlement of this matter with the SEC and the earlier decision by the DOJ to close its inquiry into Vantage and VDC without taking any action, the investigation of Vantage and VDC by the United States government for possible violations of the FCPA has formally concluded.
Mr. Ihab Toma, Vantage’s Chief Executive Officer, stated, “We are very pleased with the closure of the United States government’s investigation into possible violations of the FCPA. Vantage has been, and remains, firmly committed to conducting its operations in compliance with all applicable laws and regulations, including the FCPA.”
On the day of the enforcement action, Vantage’s stock closed up .67%.
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